Social media is emerging as an unstoppable force. According to one report, approximately 1.73 billion people – or 25% of the world’s population – are now social network users, and most large global companies have established active
Twitter, Facebook and YouTube accounts. Some banks and other financial services firms originally tried to block or curtail the use of social media, but it is becoming increasingly clear that it is better to manage social media effectively than to try to stand in its way.

There are risks associated with social media – risks that go beyond people saying bad things about a brand – and banks’ traditional approaches to riskmanagement are not designed to cope with the huge amount of chat and data generated by these fast-growing communication channels. However, by understanding the different risks – whether they are related to fraud, compliance, legal, regulation, or the marketplace – and then putting in place the right governance, processes and systems, banks can embrace the power of social media while managing the risks as well.

A comprehensive risk management approach based on specific activities addressing these three broad areas can help banks, insurers and capital markets firms realize the potential of a sound social media strategy:

1. Governance. Financial services firms need to implement structures, policies and accountabilities for managing social risk, as well as create awareness of how the organization is using social media. The structure and assignment of responsibilities should ensure that the risk function is engaged in these strategic discussions.

Development of acceptable-use policies for employees – as well as for contractors and vendors – is another important step. Such policies should not start with a blank page but should instead build upon existing standards covering media interaction, public communications, and the handling of confidential information.

Financial services firms also need to define their level of engagement through social media. For example, if a bank decides to become more active on social media, interacting and encouraging conversations with customers and the public at large, it opens itself up to a higher degree of risk and potential reward.

2. Processes. Financial services firms understand the importance of having consistent processes in place to handle identifying, measuring, managing and reporting on risks. However, such processes will often look somewhat different in the social media world, in part because of the always-on nature of social networking platforms.

Firms need to establish risk tolerance levels for social media activities. This means establishing roles and accountabilities and also identifying opportunities – new products, services and partnerships – that could be explored in light of the firm’s social media risk strengths and weaknesses.

Effective monitoring is another key process in managing the risks of social media. Monitoring is essential for early identification of problems that can lead to increased business risk. New technologies, such as web crawlers using sentiment analysis technology, can find references to a firm, infer whether the reference is positive or negative, and report back in virtually real-time.

3. Systems. A number of tools are now available that enable organizations to mine data across social media platforms and look for particular kinds of information. Data mining and analytics can turn the apparent randomness and chaos of millions of posts and tweets into information that can help guide marketing and inform business strategies.

Data mining of social media can improve business intelligence to provide better services and develop innovative opportunities. For example, data mining can help identify who the influential people are in the social media world, detect groupings of people, sense user sentiments, protect security and user privacy, and help build trust between companies and customers. Text analytic engines find meaningful patterns in the data to deliver key insights. These engines can also segment information to support better decision making—decisions based on hard data, especially unstructured or “big” data.

While governance, processes and systems are all necessary elements for effective social media risk management, much of risk management still depends on people. As a banking social media executive told us in our recently issued report, “Mitigating social media risks is not all about the technology. You can put in as many firewalls as you like, but people still need to be knowledgeable about risks and understand their role in mitigating them”. Firms adept at managing social media risk emphasize the importance of making risk management part of everyone’s daily responsibilities. In a bank with a risk-aware culture, people at all levels instinctively look for risks and their impacts when using social media.

Few financial services firms can afford to ignore the power and pervasiveness of social media. While social media presents new risks, an organized approach to social media risk management can mitigate these risks and help banks, insurers and capital markets firms gain significant value from an integrated social media strategy.